As Steve Ballmer announces he is to retire within the year, Katherine Rushton
and Matt Warman ask how Microsoft got where it is - and where it goes next

Forget the launch of the Surface tablet or Windows 8. For many Microsoft investors, this was the moment they had been waiting for. Steve Ballmer’s departure as chief executive marks the company’s opportunity to reinvent itself.

Mr Ballmer’s departure was not unexpected, but few thought it would happen so soon. Although he has spent a long time at the helm of the computer giant, presiding over its steady decline of the past decade, he is also its second largest shareholder and has the backing of Bill Gates, Microsoft’s founder. He was not under pressure to jump until he was ready to do so.

However, he had run out of ways to try to reinvigorate Microsoft. The company was founded on the principle that if it cracked the right software, the rest of the pieces would fall into place. It was a strategy that paid handsome dividends for many years, as its Windows operating system became the default option for computer manufacturers. If Dell or HP wanted their PCs to have any traction in the market whatsoever, they had to ensure that they came with Microsoft’s software pre-installed.

But the world eventually changed around it, and gadgets rather than software become the key to success.

Apple had spent years snapping at Microsoft’s heels, but it pulled into the lead by launching a string of sleek devices – the iPod, the iPhone, the iPad. Apple knew that if the hardware was good enough, it could persuade users to accept its own, newer operating system, and leave Microsoft far behind.

Meanwhile, Google steadily chipped away at other parts of Microsoft’s business, using its free Android operating system and its Chrome web browser to woo hardware companies like Samsung, knocking Microsoft yet another rung lower.

Mr Ballmer was too slow to fully recognise the shift.

Microsoft joined forces with Nokia in 2011 to produce the first fully-fledged Windows smartphone, and launched its first ever tablet, the Surface, last year.

Its last great bet was on Windows 8, a radical reinvention of its iconic operating system and designed to allow people to flip easily between tablets and PCs.

But the innovations failed to catch the public imagination and sales were painfully slow. Microsoft was on the back foot.

The vicious cycle of decline had a negative impact on morale both inside and outside the company. Shares in Microsoft have fallen by more than a third since Mr Ballmer’s appointment in 2000, and staff complain the company has lost its culture of innovation.

So where does Microsoft go next? It must decide whether a product such as the upcoming Xbox One can make it cool. Whether, when connected to televisions around the world, it might also form an entertainment hub for families who are becoming more reliant on technology.

Or Microsoft may decide that it should be a business focused on software such as Windows and services such as Office, and to hell with cool.

Those two are not mutually exclusive, but shareholders are already questioning whether the firm might not be more efficient and more valuable as two separate businesses.

Is Microsoft already a hardware company? It makes its own tablets under the Surface brand, still leads the way in mice and keyboards and produces the Xbox.

Either way, as technology has expanded its part in our lives, Microsoft has started to look like a conglomerate that makes vast profits but has precious little focus.

The company could make a go of any of the businesses mentioned, but it is currently emphasising two: Windows 8 and Windows Phone. The former is an update to the operating system used around the world that analysts and users branded a revolution when they wanted an evolution. The latter is a rival to Google and Apple that has yet to make much more of an impact in the West than the ailing BlackBerry.

But this focus is not as perverse as it sounds. Ballmer explicitly bet Microsoft on Windows 8, with its focus on internet services and touchscreens. It was to be the operating system around which the next decade of success was to be built.

What the new boss can decide is which of Microsoft’s many facets should be the real focus. Under Ballmer, it was hard to believe that the Xbox and Windows PC were really from the same ethos.

In an age in which consumers and businesses increasingly use the same services, any successor must build a brand that people can buy into rather than use under duress.

Its hard to envisage a company that achieves that and does not also feel significantly smaller.